EQ: After trading in a fairly narrow range last week, the S&P 500 seems to be experiencing a bit of choppy near-term trading around the 2000 level this week. However, it seems that a number of Wall Street analysts are becoming more optimistic on the market’s direction. Have you noticed a sentiment shift recently from analysts?

Stovall: Not necessarily from the analysts, because I look at the average S&P Capital IQ STARS ranking, which is an acronym for Stock Appreciation Ranking System. A 5 on the scale is a strong buy and a 1 is a strong sell. The average has remained pretty close to 3.4, obviously indicating a preference for larger-cap issues at this point in the cycle. So I haven’t really seen that deviate.

However, I have seen a greater number of strategists increasing their year-end and 12-month targets for the S&P 500. Also, Investor’s Intelligence reported that only 13.3% of its newsletter writers that it polled are bearish. That’s the lowest number since 1987. So I think the strategists and newsletter writers on the Street are becoming more bullish, but not necessarily the analyst recommendations.

EQ: We still haven’t seen a return of volatility to the markets, even as we’re approaching the fourth quarter of 2014. Should this help put investors at ease or heighten their awareness?

Stovall: The unfortunate thing is the volume has been pretty light for most of this bull market, and that has been a point of contention for a lot of strategists that say that there’s something evil lurking because volume has been so low. If you’ve been staying on the sidelines thinking something was going to jump out and bite you, you would’ve missed this entire move on the S&P 500.

Volume has indeed been low, and volatility has been half of what it has been on average going back to 2000. So I think it’s just one of those things that happens to be reflective of this bull market.

EQ: Is this a permanent change in the dynamics of the market or is this just a result of investors still being gun-shy from five years ago?

Stovall: I think a lot of individual investors are gun-shy, but I also think it’s because there are fewer and fewer shares out there because of all the share buybacks. Maybe that has something to do with it. I’m not necessarily sure what exactly is the main cause of this, but investors just sitting on their hands could be one real reason.

If they should decide to get back into this market in full force, then maybe we will end up seeing the volume and volatility change dramatically. Perhaps that’s why some people say that bull market take the escalator while bear markets take the elevator. Not everybody tries to get into a bull market at the same time, but everybody tries to get out of a bear market at the same time.

EQ: In this week’s Sector Watch, you examined how the S&P 500 performed after hitting a new all-time high for each of the 12 months. Considering that the most recent all-time high was established in the historically weakest month of the year, is this promising for bulls?

Stovall: In the near term, no. But in the intermediate and longer term, yes. What I mean by that is September is one of the weaker months, and even when a new high is set in September, we traditionally continue to see one month’s worth of weakness after hitting an all-time high for the S&P 500. Yet, six months later, the average price increase is a little more than 6%, which is 50% better than the average of all six-month periods since World War II. Then 12 months later, the market is up a bit more than 11% versus the normal 8.5% increase over a 12-month period.

So while we might end up catching our breath a little bit in the month ahead after establishing our 78th new high in this bull market, history says—but does not guarantee—that we could end up getting a second wind over the coming six-to-12-month period. That we could potentially see the market approaching the mid-2200 level on the S&P 500.

EQ: You also looked at the number of new highs by sector since the market top of 2007. There were two sectors that are still below their October 2007 levels. While it’s understandable why Financials is still underwater, isn’t it somewhat surprising that Telecom is also on that list considering how much their services have grown with Smartphones, internet, and cable television the past eight or so years?

Stovall: Yes, I think so. Financials was down about 83% in price from Oct. 10, 2007 to March 9, 2009, so it would have to more than double just to get back to break-even. Telecom, however, was a bit a surprise being down 10% from 2007 high, but the I think the benefit for Telecom is that by adding back dividends, then you’re looking at a total return that is about 30%.

So it may be a bit unfair to evaluate those sectors like Telecom, Utilities, and Consumer Staples to a lesser extent on a price-only basis, because a lot of their growth comes from re-invested dividends. The best kind of an analysis for these sectors may be done on a total return basis. Unfortunately, we do not have total return indices for the sub-industries on the S&P 500. So in that case, we’d end up comparing oranges to tangerines at best.

DISCLOSURE:
The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer